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Uttar Pradesh, which has the largest number of cities (10) the under Smart City Mission (SCM), is encouraging its urban centres to mop up resources to fund their developmental and infrastructure projects.

Taking the lead, Lucknow Municipal Corporation (LMC) has planned to float municipal bonds worth Rs 1 billion for a multi-storied housing project. If LMC is successful in issuing these bonds, it would not only be the first municipality in UP but in entire North India, barring New Delhi Municipal Corporation (NDMC), to achieve the feat.

A municipal bond is debt security issued by a municipality to finance capital expenditure. It fetches the investor payments on a predetermined rate of interest over a stipulated time period.

Unlike the USA, India has not seen much success with municipal bonds, primarily because of the non-participation of retail investors. In India, Bangalore Municipal Corporation was the first urban local body (ULB) to issue such bonds, followed by Ahmedabad. However, ULBs have largely been unsuccessful in mobilising funds through this route. In 2015, market regulator Securities and Exchange Board of India (SEBI) had issued fresh guidelines for municipal bonds.

However, municipal bonds are now regarded as vital cogs in the context of SCM, which aims at improving 100 Indian cities by 2020 in relation to water supply, transportation and sanitation.

Meanwhile, LMC would put the municipal bond proposal before its cabinet comprising elected corporators on Monday. If the proposal gets the nod, it would be taken to the LMC Board. “LMC has taken the lead in UP with regards to the municipal bonds and we are confident of sailing through, although it is a long drawn process before fruition,” Corporation additional municipal commissioner P K Srivastava told Business Standard.

The proposal would also need the approval of the Yogi Adityanath government before it is forwarded to the Centre and SEBI, he informed.

According to sources, a similar proposal to issue municipal bonds last year was shelved, since it failed to meet the required financial criteria with regards to annual budget size and standing liabilities. Currently, the LMC annual budget is to the tune of over Rs 22 billion with liabilities of about Rs 2.5 billion, especially salaries and outstanding payments.

Last year, 94 Indian cities had received credit ratings from agencies such as CRISIL, as part of their preparations towards issuing municipal bonds. Of the 94 cities, only 55 cities had received investment-grade ratings. The individual city ratings are the same as bond ratings.

Currently, retail investors are not allowed to invest in municipal bonds, besides most mutual funds have also been shy of these bonds, since these instruments are still new in the capital market. However, experts are of the view these debt instruments would pick up with time especially when the SCM gathers steam.